Grocery-delivery companies race to compete in quick commerce

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Behind a frosted glass storefront in downtown Toronto, rows of shelves displayed grocery products in no apparent order.

Bottles of olive oil sat next to jars of strawberry jam, sardine tins and bags of raisins. Price tags were nowhere to be found. In place of regular signs, laminated sheets of paper marked shelves with “JJ” or “E.”

This “dark store” would be confusing to a typical shopper, but it was not designed with them in mind. Closed to the public, it acted as a mini-warehouse dedicated to online grocery orders only. During The Globe and Mail’s visit in April, workers guided by an app scurried through the aisles, packing up those orders in as little as two minutes.

This facility was run by Vancouver-based startup Tiggy, one of a growing number of companies taking on the giants of the grocery industry by promising fast delivery. Very fast – from order to your door in as little as 15 minutes.

“We see huge potential in this market,” Tiggy co-founder Eugene Bisovka said. “The grocery market in Canada is underpenetrated, in terms of online sales. … This is going to be growing a lot in the next few years.”

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But more recently, Tiggy suspended operations at this location and three others it operates in the city. While the company still delivers from six locations in Vancouver, in Toronto it is working “to form a new approach and perhaps seek a strategic partner,” Mr. Bisovka wrote in an e-mail.

In the space of a few months, the business model has shifted, highlighting how volatile the fledgling quick-commerce space is. While Canada’s largest grocers have already been investing heavily in expanding their e-commerce services, they mostly require shoppers to order at least a few hours in advance of a delivery. But that is beginning to change, as big grocers have begun to respond to these startups by testing their own quick-delivery options. More and more companies are investing heavily in offerings that claim to give customers the fastest, cheapest service, ramping up the competitive pressures. A rush of new players have raised funds and made bets on serving a market for people who want grocery items right away.

But whether the industry has room for so many players is an open question. Consolidation is already beginning: Two weeks ago, Toronto-based delivery service Inabuggy Inc. acquired Waterloo, Ont.-based competitor Ninja Delivery. And bigger players also want their slice of the pie: Last week, Loblaw Companies Ltd. unveiled a deal with DoorDash to offer faster grocery delivery starting this August, with many orders arriving in 30 minutes or less. Just one day after the Loblaw announcement, Walmart Canada said it is also testing a 30-minute option in a partnership with Instacart.

Other competitors include Toronto’s GoodGood, larger restaurant-delivery companies such as SkipTheDishes, and Montreal meal-kit delivery service Goodfood, which are building their own mini-warehouses to deliver groceries and other everyday items. In late April, Canadian convenience store giant Alimentation Couche-Tard Inc. led a US$25-million venture capital financing of Chicago-based 15-minute delivery company Food Rocket.

The fast grocery-delivery trend first took hold in markets such as Berlin, London, Paris and New York, led by players like Getir, Gorillas and Gopuff that have collectively raised billions of dollars but have yet to expand to Canada.

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Now, the race is on to build such “quick-commerce” services here.

“Nobody knows how big it will actually be,” said Lauren Steinberg, senior vice-president of Loblaw Digital. “But we can’t identify the size until we’re playing in it, and we do believe that if we wait, we will be too late. If it happens, and we think it will, we don’t want to be caught off guard.”

Challenges lie ahead: Some startups in the United States have gone out of business; Gopuff and Getir both recently laid off hundreds of workers; Jokr closed its U.S. business to focus on Latin America; and Gorillas has slowed its U.S. expansion plans and recently closed operations in Belgium. With many of the businesses far from breaking even, a recession or less buoyant financing conditions could negatively affect them. And shoppers already feeling the sting of high food prices may be wary of markups on some online services compared with what they can find in stores. Many nascent players will fail, said Sylvian Perrier, chief executive officer of Toronto-based e-commerce research and consulting firm Mercatus.

“If you look at the U.S. as a model, it’s an unfortunate race to the bottom,” he said.

There are good reasons why 90 per cent of people who buy groceries in Canada do so in stores. The online grocery experience has not always lived up to customer expectations. Even at large grocers, orders often arrive with products missing or substituted for others, and same-day delivery is not always available.

But there is demand for faster options, says Stifel GMP analyst Martin Landry. In a survey he conducted of 300 Canadians last fall, 85 per cent said it would be very or somewhat valuable to receive groceries ordered online within two hours, and 61 per cent said they would switch from their usual grocer to a quick delivery provider.

“It will be a large market, it will grow fast and there will be room for a lot of players,” Mr. Landry says.

Existing delivery companies are taking notice. Winnipeg-based SkipTheDishes, owned by Just Eat Takeaway.com, saw orders for deliveries from convenience stores such as 7-Eleven jump from roughly 20,000 a month in April, 2020, to close to 400,000 by the end of 2021. In December, the company announced it would build its own “dark stores,” called Skip Express Lane, to deliver items such as snacks, pantry staples, milk and eggs in less than 25 minutes. It now has 16 locations in 12 cities in Canada, and is on track to open 13 more this summer. DoorDash opened similar facilities, called DashMarts, in Toronto, London, Kitchener, Vancouver and Winnipeg late last year. Its new partnership gives the company access to Loblaw’s supply chain to better stock its DashMarts, which have expanded across Canada this year according to the company, although it would not disclose how many DashMarts currently operate here.

“It’s a trend across the world. … We haven’t really seen it go outside of the big cities just yet, just because logistically it’s really challenging,” DoorDash co-founder Andy Fang says.

Some companies will build multiple dark stores in a given city, because each location has a limited radius of customers it can reach within a 30-minute delivery window. These stock fewer items than a typical large warehouse or grocery store, focusing just on the produce, snacks and other everyday items people are most likely to order.

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But dark stores have created friction in some established markets, such as the U.S., Britain and Europe. Operators have reportedly flouted health regulations and zoning codes in Boston, while some neighbours in New York and Berlin have complained about the noise and congestion generated by delivery people and suppliers scooting in and out at all hours. Gorillas riders in Berlin held wildcat strikes last year, complaining about not being paid and a lack of safety equipment, among other concerns. Dark stores have also faced complaints in New York for taking up space that should be occupied by retailers open to the public.

Here in Canada, not all startups vying for a piece of the market rely on gig-economy workers. Tiggy hires its own riders, who are paid by the hour and deliver on company e-bikes – even in Canada’s variable weather. Before being sold to Inabuggy, Ninja Delivery did the same, and Inabuggy has similar plans for its rapid delivery service. But workers that are treated as outside contractors, rather than employees, are still a common feature of the industry.

Ninja opened its first dark store in Waterloo last September, followed by two more in Toronto, all of which were shuttered ahead of the Buggy acquisition. Ninja’s 10-minute deliveries were made possible by limiting its radius to within one mile of each location. Even within a small radius around each store, “there’s a huge portion of people we can convert,” co-founder and CEO Wesley Yue told The Globe in an interview in late March before the company was acquired. Ninja had been planning to open roughly 10 more locations in the Greater Toronto Area over the coming year, and was eyeing expansion in Vancouver.

Toronto-based Inabuggy was drawn to Ninja while working to adapt its own delivery model. The company started out in 2014 by offering grocery delivery for a $20 fee. But Inabuggy recently underwent a rebrand (its consumer-facing services are now called Buggy) and a leadership shift, with the appointment of serial tech entrepreneur Nicole Verkindt as CEO. In an interview, Ms. Verkindt says Buggy is shifting its focus to much faster delivery – within 30 minutes – at a much lower fee of $2.99. Ninja’s top 10 per cent of customers were ordering from the service more than once a week, Ms. Verkindt says, explaining the appeal. She was convinced of the value of the superfast delivery model after spending time in the U.S. and Britain, where such services are much more common.

The company recently raised funds with a plan to build its own dark stores, starting with its first location launching in Toronto this month, in addition to its current system that fills orders from retailers such as Costco or Metro. Dark stores have better profit margins because Buggy can buy items wholesale; and it provides better inventory visibility so there are fewer substitutions or missing products.

“In Canada, there still isn’t really a significant player in this space,” Ms. Verkindt says.

But the capital needs of building these services can weigh heavily on businesses. Meal-kit delivery company Goodfood has been investing heavily in a shift to online grocery sales as its cook-at-home kit business matures: It plans to launch 50 or more dark stores in Canada by 2025.

The company says users for the service, which promises grocery delivery in 30 minutes, have more than doubled in the past quarter, to 27,000 people, and that those customers generate twice as much revenue than people who just use the meal-kit service.

But Goodfood’s cash from operations and capital expenditure outflow has exceeded $90-million in the past three quarters, representing a “massive” change, says Raymond James analyst Michael Glen. “We have not seen any tangible indication regarding what the returns on this capital look like,” he says.

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Goodfood is tightening its belt: The company recently cut 2.8 per cent of its 2,500-plus work force as “we embarked on an accelerated plan to profitability” given the darkening macroeconomic backdrop, CEO Jonathan Ferrari said in an e-mail.

“Over the next couple of months – just given what’s going on in the macro economy – I think a lot of companies will have to really tighten their belts,” DoorDash’s Mr. Fang says, referring to the difficulty startups are having right now with attracting funding. “A lot of companies are going to have to reconsider their business model. You’re seeing some companies, they’re not always guaranteeing the 15-minute promises any more. I think that’s just people trying to figure out how to make it a more sustainable operating model.”

As competition heats up, many services are courting customers with delivery deals that can seem almost irrationally good: Skip Express Lane charges nothing for delivery on purchases over $25, or a fee of $2 to $4 for smaller orders. Tiggy started out by offering free deliveries no matter what the basket size, but in mid-May it began requiring a $50 spend to waive the charge; orders under $30 now cost $2.99 to deliver, or 99 cents for purchases from $30 to $50.

Even with low fees, costs to shoppers can add up in other ways: A tub of chocolate Haagen-Dazs ice cream cost $8.39 in a Tiggy order in mid-April, and was listed by both Ninja and Skip Express Lane at the same time for $7.99. By contrast, the same ice cream was listed for just $6.99 on the websites of grocers Metro, Loblaw’s PC Express and Sobeys’ Voilà. Other extras, such as tips for drivers – which are encouraged by many of the smaller players – add to the cost of quick delivery.

Higher prices are not necessarily a deal-breaker: Bricks-and-mortar convenience stores have thrived for years while selling some items at significant markups. Ninja co-founder Mr. Yue compares these types of delivery services with smaller neighbourhood grocery stores that cannot always match grocery chain prices, but still draw customers because of their proximity. As such services scale up to hundreds of orders a day, he argues, they’ll be able to bring down prices.

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But in an inflationary environment, growing price sensitivity could be a hurdle. And these new players are up against grocery giants that can negotiate volume discounts and delivery preferences unavailable to small players.

“They don’t have the assets of the big Loblaw supply chain, for example. That’s a big differentiator,” Loblaw’s Ms. Steinberg said. “In our assessment of the market, what we saw was, there are a lot of players entering this space, there were a lot of players exiting this space. When you talk to customers, when you read reviews online of these services, customers love them. It was really on the player themselves … to actually build a sustainable business, which in many cases was a struggle.”

Even for those large grocers, it’s still unclear how profitable grocery e-commerce is or how large the market could become. But increasingly, they see having online services as necessary to hold on to customers. “At the end of the day, you have to participate,” says Moritz Steinbauer, vice-president with credit rating agency DBRS Morningstar. “If you want to maintain market share, you have to play in it.”

Canada’s biggest grocers have been partnering with delivery companies such as Instacart and Uber-owned Cornershop, to supplement their own e-commerce services with faster options as well. Those types of services differ from quick-delivery models because they tend to shop existing stores rather than operating their own mini-warehouses and buying their own inventory. Metro Inc. CEO Eric La Flèche told analysts in April that the general trend for e-commerce delivery is for “immediacy, short windows, two hours, 30 minutes, next day.” Metro already offered two-hour delivery through Cornershop, and has a new partnership with Instacart for delivery in one hour or less.

Still, the market is somewhat limited. There are only 400 to 500 cities globally large and dense enough to support these services, and only a handful in Canada, says Vishwa Chandra, a McKinsey consultant specializing in food service and e-commerce based in San Francisco.

Despite the skepticism, venture capital has flowed into the sector. Tiggy completed a $6.35-million seed round in December, 2021, and is in the process of closing a seed round extension. Its investors include Canadian funds Inovia Capital, Garage Capital and Berlin-based Global Founders Capital.

Toronto-based startup OrderGrid recently raised $5-million led by British online food-delivery company Deliveroo and backed by Dragon’s Den star Michele Romanow and her long-time business partner Anatoliy Melnichuk to build software for fast grocery-delivery services. OrderGrid tracks and manages inventory, and guides workers around dark stores to fill orders. It initially built most of its business abroad, working with both startups and large grocers such as France’s Carrefour and England’s Waitrose. Canadian customers are now signing up.

“We have exploded over the last six months,” says OrderGrid co-founder and CEO Kris Calder. “We’re seeing this growth everywhere.”

In markets where these services have grown faster than Canada, Mr. Calder has seen just how wild the competition to acquire customers can be, with bus and taxi ads plastered with various companies’ logos, and some firms handing out promotions and discount codes.

“The companies that just spend on acquisition but don’t focus on operations are going to have a hard time,” Mr. Calder says. He believes responsible operators can make it work. In other markets, he has seen shoppers get accustomed to ordering multiple times a week.

But that also means they tend to buy fewer items in a given order. Before being sold, Ninja’s average order was just $30 – much smaller than the typical basket at grocery stores. For the economics to work – including hiring order pickers and drivers – such services need a steady volume of orders.

“Anywhere that you can make pizza delivery work, you can make this model work,” Mr. Yue said in March.

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Habit-building is a work in progress. The average Skip Express Lane customer now places two orders each month, SkipTheDishes chief operating officer Howard Migdal says. But those rates are growing.

Still, there are kinks to work out. Back at Tiggy’s location in Toronto in April, picker Bryan Francis power-walked the aisles, muttering “H5″ to himself as he looked for his next item. He carried a blue shopping basket slung over one arm, and frequently checked his phone, where Tiggy’s software displayed a shopping list and pointed him to the right shelf for each product.

One order – oranges, ice cream, eggs and cheese – was picked in a couple of minutes. But at the other end of the transaction, seven minutes in, the app told the customer it was still looking for a courier. The delivery still arrived fast, but it took about 20 minutes, not quite the 15 that Tiggy promised at the time. In mid-May, at the same time it changed its delivery-fee structure, Tiggy also adjusted its guaranteed time to a more realistic 30 minutes.

If Tiggy can get groceries right, it eventually wants to branch out to other merchandise. Retailers across the industry are racing to meet demand as e-commerce grows – and are looking for delivery logistics partners. “What we are building is direct access to customers, which is something that most brands want,” Mr. Bisovka said.

But with expansion plans stalling, big rivals looming and customers ready to gravitate to the cheapest and fastest option, for Tiggy and many other startups, there is still work to be done – and the race to compete in quick-commerce is on.

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